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TABLE OF CONTENTS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
| (Mark One) | |
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
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Commission file number 333-85141
HUNTSMAN INTERNATIONAL LLC
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
87-0630358 (I.R.S. Employer Identification No.) |
|
500 Huntsman Way Salt Lake City, Utah 84108 (801) 584-5700 (Address of principal executive offices and telephone number) |
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES o NO ý
On May 17, 2004, 1,000 member equity units of the registrant were outstanding. There is no established trading market for registrant's units of membership interest. All of registrant's units of membership interest are held by an affiliate.
HUNTSMAN INTERNATIONAL LLC
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 2004
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in Millions)
| |
March 31, 2004 |
December 31, 2003 |
||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 80.5 | $ | 97.8 | ||||
| Trade receivables (net of allowance for doubtful accounts of $13.8 and $13.4, respectively) | 615.7 | 538.5 | ||||||
| Accounts receivable—affiliates | 50.4 | 25.9 | ||||||
| Inventories | 535.8 | 596.9 | ||||||
| Prepaid expenses | 25.1 | 23.6 | ||||||
| Deferred income taxes | 3.0 | 3.0 | ||||||
| Other current assets | 72.8 | 83.6 | ||||||
| Total current assets | 1,383.3 | 1,369.3 | ||||||
| Property, plant and equipment, net | 3,222.6 | 3,256.2 | ||||||
| Investment in unconsolidated affiliates | 148.8 | 138.7 | ||||||
| Intangible assets, net | 275.2 | 283.4 | ||||||
| Other noncurrent assets | 438.1 | 445.1 | ||||||
| Total assets | $ | 5,468.0 | $ | 5,492.7 | ||||
| LIABILITIES AND MEMBER'S EQUITY | ||||||||
| Current liabilities: | ||||||||
| Trade payables (including overdraft facilities of $12.4 and $7.5, respectively) | $ | 476.7 | $ | 483.6 | ||||
| Accounts payable—affiliates | 108.8 | 77.7 | ||||||
| Accrued liabilities | 296.6 | 387.7 | ||||||
| Current portion of long-term debt | 1.8 | 1.8 | ||||||
| Total current liabilities | 883.9 | 950.8 | ||||||
| Long-term debt | 2,997.2 | 2,925.3 | ||||||
| Deferred income taxes | 236.7 | 234.8 | ||||||
| Other noncurrent liabilities | 225.4 | 224.5 | ||||||
| Total liabilities | 4,343.2 | 4,335.4 | ||||||
| Minority interests | 6.2 | 3.6 | ||||||
| Commitments and contingencies (Notes 15 and 16) | ||||||||
| Member's equity: | ||||||||
| Member's equity, 1,000 units | 1,026.1 | 1,026.1 | ||||||
| Retained earnings | 18.7 | 55.6 | ||||||
| Accumulated other comprehensive income (loss) | 73.8 | 72.0 | ||||||
| Total member's equity | 1,118.6 | 1,153.7 | ||||||
| Total liabilities and member's equity | $ | 5,468.0 | $ | 5,492.7 | ||||
See accompanying notes to consolidated financial statements.
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HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(Dollars in Millions)
| |
Three Months Ended March 31, 2004 |
Three Months Ended March 31, 2003 |
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|---|---|---|---|---|---|---|---|---|---|
| |
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As Restated, see Note 18 |
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| Revenues: | |||||||||
| Trade sales | $ | 1,454.6 | $ | 1,188.8 | |||||
| Related party sales | 36.5 | 100.5 | |||||||
| Tolling fees | 7.0 | 8.4 | |||||||
| Total revenues | 1,498.1 | 1,297.7 | |||||||
| Cost of goods sold | 1,350.0 | 1,162.3 | |||||||
| Gross profit | 148.1 | 135.4 | |||||||
Expenses: |
|||||||||
| Selling, general and administrative | 87.8 | 71.1 | |||||||
| Research and development | 12.2 | 12.2 | |||||||
| Restructuring and plant closing costs | 8.7 | 17.1 | |||||||
| Total expenses | 108.7 | 100.4 | |||||||
| Operating income | 39.4 | 35.0 | |||||||
Interest expense |
(69.0 |
) |
(64.4 |
) |
|||||
| Interest income | — | 0.8 | |||||||
| Loss on accounts receivable securitization program | (3.5 | ) | (9.2 | ) | |||||
| Other expense | (0.2 | ) | (2.2 | ) | |||||
| Loss before income taxes | (33.3 | ) | (40.0 | ) | |||||
| Income tax benefit (expense) | (3.6 | ) | 7.9 | ||||||
| Net loss | (36.9 | ) | (32.1 | ) | |||||
Other comprehensive income |
1.8 |
5.1 |
|||||||
| Comprehensive loss | $ | (35.1 | ) | $ | (27.0 | ) | |||
See accompanying notes to consolidated financial statements.
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HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBER'S EQUITY (UNAUDITED)
(Dollars in Millions)
| |
Member's Equity |
|
Accumulated Other Comprehensive Income (Loss) |
|
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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Retained Earnings |
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Units |
Amount |
Total |
||||||||||||
| Balance, December 31, 2003 | 1,000 | $ | 1,026.1 | $ | 55.6 | $ | 72.0 | $ | 1,153.7 | ||||||
| Net loss | — | — | (36.9 | ) | — | (36.9 | ) | ||||||||
| Other comprehensive income | — | — | — | 1.8 | 1.8 | ||||||||||
| Balance, March 31, 2004 | 1,000 | $ | 1,026.1 | $ | 18.7 | $ | 73.8 | $ | 1,118.6 | ||||||
See accompanying notes to consolidated financial statements.
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HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Millions)
| |
Three Months Ended March 31, 2004 |
Three Months Ended March 31, 2003 |
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|---|---|---|---|---|---|---|---|---|
| |
|
As Restated, see Note 18 |
||||||
| Cash Flows From Operating Activities: | ||||||||
| Net income (loss) | $ | (36.9 | ) | $ | (32.1 | ) | ||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 77.0 | 69.0 | ||||||
| Provision for losses on accounts receivable | 0.3 | 1.8 | ||||||
| Noncash interest expense | 4.2 | 3.0 | ||||||
| Deferred income taxes | 3.0 | (9.8 | ) | |||||
| Unrealized gain on foreign currency transactions | (6.4 | ) | (18.2 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (115.5 | ) | (69.2 | ) | ||||
| Change in receivables sold, net of cash received | 8.8 | 11.8 | ||||||
| Inventories | 62.0 | (34.1 | ) | |||||
| Prepaid expenses | (0.8 | ) | 5.3 | |||||
| Other current assets | (13.1 | ) | (15.0 | ) | ||||
| Other noncurrent assets | (0.8 | ) | (0.8 | ) | ||||
| Accounts payable | 23.4 | (0.5 | ) | |||||
| Accrued liabilities | (61.4 | ) | (44.2 | ) | ||||
| Other current liabilities | (2.9 | ) | (0.3 | ) | ||||
| Other noncurrent liabilities | (0.1 | ) | 0.1 | |||||
| Net cash used in operating activities | (59.2 | ) | (133.2 | ) | ||||
| Investing Activities: | ||||||||
| Capital expenditures | (38.2 | ) | (21.8 | ) | ||||
| Investment in unconsolidated affiliate | (11.9 | ) | — | |||||
| Net cash received from unconsolidated affiliates | 1.8 | — | ||||||
| Advances to unconsolidated affiliates | (0.6 | ) | (2.0 | ) | ||||
| Proceeds from sale of fixed assets | — | 1.2 | ||||||
| Net cash used in investing activities | (48.9 | ) | (22.6 | ) | ||||
| Financing Activities: | ||||||||
| Net borrowings (repayments) under revolving loan facilities | 88.0 | 134.2 | ||||||
| Repayment of long-term debt | — | (1.4 | ) | |||||
| Net borrowings under overdraft facility | 4.9 | — | ||||||
| Net cash provided by financing activities | 92.9 | 132.8 | ||||||
| Effect of exchange rate changes on cash | (2.1 | ) | (3.1 | ) | ||||
| Increase (decrease) in cash and cash equivalents | (17.3 | ) | (26.1 | ) | ||||
| Cash and cash equivalents at beginning of period | 97.8 | 75.4 | ||||||
| Cash and cash equivalents at end of period | $ | 80.5 | $ | 49.3 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | 104.0 | $ | 83.5 | ||||
| Cash paid for income taxes | $ | 3.0 | $ | 3.4 | ||||
See accompanying notes to consolidated financial statements.
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HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. General
Description of Business
Huntsman International LLC (the "Company," including its subsidiaries, unless the context otherwise requires) is a global manufacturer and marketer of differentiated and commodity chemicals. The Company manages its business through four segments: Polyurethanes, Performance Products, Pigments and Base Chemicals. The Company manufactures its products at facilities located in North America, Europe, Asia and Africa and sells its products throughout the world.
Company
The Company is a wholly-owned subsidiary of Huntsman International Holdings LLC ("HIH"). All of the membership interests of HIH are owned directly and indirectly by HMP Equity Holdings Corporation ("HMP"). HMP is 100% owned by Huntsman Group Inc. ("HGI"), subject to warrants which, if exercised, would entitle the holders thereof to up to 12% of the common equity of HMP. HGI is 100% owned by Huntsman Holdings, LLC ("Huntsman Holdings"). The voting membership interests of Huntsman Holdings are owned by the Huntsman family, MatlinPatterson Global Opportunities Partners, L.P. ("MatlinPatterson"), Consolidated Press (Finance) Limited ("Consolidated Press") and certain members of senior management. In addition, Huntsman Holdings has issued certain non-voting preferred units to Huntsman Holdings Preferred Member LLC, which, in turn, is owned by MatlinPatterson (indirectly), Consolidated Press, the Huntsman Cancer Foundation, certain members of senior management and certain members of the Huntsman family. Huntsman Holdings has also issued certain non-voting preferred units to the Huntsman family, MatlinPatterson, and Consolidated Press that track the performance of an affiliate, Huntsman Advanced Materials LLC ("AdMat"). AdMat's results of operatrions are not included in these consolidated financial statements. The Huntsman family has board and operational control of the Company.
Interim Financial Statements
The unaudited consolidated financial statements of the Company were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and in management's opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of results of operations, financial position and cash flows for the periods shown, have been made. Results for interim periods are not necessarily indicative of those to be expected for the full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. Recently Issued Financial Accounting Standards
In January 2003, the Financial Accounting Standards Board ("FASB") issued Financial Interpretation No. ("FIN") 46, "Consolidation of Variable Interest Entities." FIN 46 addresses the requirements for business enterprises to consolidate related entities, for which they do not have
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controlling interests through voting or other rights, if they are determined to be the primary beneficiary as a result of variable economic interests. Transfers to a qualifying special purpose entity are not subject to this interpretation. In December 2003, the FASB issued a complete replacement of FIN 46 (FIN 46R), to clarify certain complexities. The Company is required to adopt this financial interpretation on January 1, 2005 and is currently evaluating its impact but does not expect the impact to be significant.
3. Inventories
Inventories as of March 31, 2004 and December 31, 2003 consisted of the following (dollars in millions):
| |
March 31, 2004 |
December 31, 2003 |
||||
|---|---|---|---|---|---|---|
| Raw materials and supplies | $ | 140.3 | $ | 180.2 | ||
| Work in progress | 19.2 | 18.0 | ||||
| Finished goods | 376.3 | 398.7 | ||||
| Total | $ | 535.8 | $ | 596.9 | ||
In the normal course of operations, the Company exchanges raw materials with other companies. No gains or losses are recognized on these exchanges, and the net open exchange positions are valued at the Company's cost. The amount deducted from inventory under open exchange agreements owed by the Company at March 31, 2004 was $3.5 million and 5.8 million pounds of feedstock and products, respectively, which represented the amount payable by the Company under open exchange agreements. The amount deducted from inventory under open exchange agreements owed by the Company at December 31, 2003 was $6.6 million and 18.7 million pounds of feedstock and products, respectively, which represented the amount payable by the Company under open exchange agreements.
4. Property, Plant and Equipment
The cost and accumulated depreciation of property, plant and equipment are as follows (dollars in millions):
| |
March 31, 2004 |
December 31, 2003 |
|||||
|---|---|---|---|---|---|---|---|
| Land | $ | 49.8 | $ | 49.4 | |||
| Buildings | 199.3 | 201.0 | |||||
| Plant and equipment | 3,972.6 | 3,938.9 | |||||
| Construction in progress | 158.2 | 156.1 | |||||
| Total | 4,379.9 | 4,345.4 | |||||
| Less accumulated depreciation | (1,157.3 | ) | (1,089.2 | ) | |||
| Net | $ | 3,222.6 | $ | 3,256.2 | |||
Property, plant and equipment includes gross assets acquired under capital leases of $19.5 million and $19.0 million at March 31, 2004 and December 31, 2003, respectively; related amounts included in accumulated depreciation were $6.1 million and $5.3 million at March 31, 2004 and December 31, 2003, respectively.
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5. Investments in Unconsolidated Affiliates
The Company's ownership percentage and investments in unconsolidated affiliates, primarily manufacturing joint ventures, are as follows (in millions):
| |
March 31, 2004 |
December 31, 2003 |
||||
|---|---|---|---|---|---|---|
| Louisiana Pigment Company, L.P. (50%) | $ | 128.6 | $ | 130.4 | ||
| BASF Huntsman Shanghai Isocyanate Investment BV (50%) | 17.9 | 6.1 | ||||
| Rubicon, LLC (50%) | 1.1 | 1.0 | ||||
| Others | 1.2 | 1.2 | ||||
| Total | $ | 148.8 | $ | 138.7 | ||
As noted, the Company owns 50% of BASF Huntsman Shanghai Isocyanate Investment BV. BASF Huntsman Shanghai Isocyanate Investment BV owns a 70% interest in a manufacturing joint venture, thus giving the Company an indirect 35% interest in the manufacturing joint venture.
6. Intangible Assets
The gross carrying amount and accumulated amortization of intangible assets as of March 31, 2004 and December 31, 2003 were as follows (dollars in millions):
| |
March 31, 2004 |
December 31, 2003 |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Gross Carrying Amount |
Accumulated Amortization |
Net |
Gross Carrying Amount |
Accumulated Amortization |
Net |
||||||||||||
| Patents, trademarks, and technology | $ | 388.6 | $ | 123.1 | $ | 265.5 | $ | 389.2 | $ | 116.9 | $ | 272.3 | ||||||
| Non-compete agreements | 49.6 | 39.9 | 9.7 | 49.6 | 38.5 | 11.1 | ||||||||||||
| Total | $ | 438.2 | $ | 163.0 | $ | 275.2 | $ | 438.8 | $ | 155.4 | $ | 283.4 | ||||||
Amortization expense for intangible assets for the three month periods ended March 31, 2004 and 2003 was $8.3 million in both periods. Estimated future amortization expense for intangible assets through December 31, 2008 is $32.0 million annually in 2004 through 2005 and $24.0 million annually in 2006 through 2008.
7. Other Noncurrent Assets
Other noncurrent assets consist of the following (in millions):
| |
March 31, 2004 |
December 31, 2003 |
||||
|---|---|---|---|---|---|---|
| Prepaid pension assets | $ | 240.6 | $ | 235.1 | ||
| Debt issuance costs | 47.9 | 54.4 | ||||
| Capitalized turnaround expense | 59.7 | 52.6 | ||||
| Receivables from affiliates | 17.5 | 13.5 | ||||
| Spare parts inventory | 51.7 | 55.6 | ||||
| Other noncurrent assets | 20.7 | 33.9 | ||||
| Total | $ | 438.1 | $ | 445.1 | ||
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8. Accrued Liabilities
Accrued liabilities consist of the following (in millions):
| |
March 31, 2004 |
December 31, 2003 |
||||
|---|---|---|---|---|---|---|
| Payroll, severance and related costs | $ | 82.7 | $ | 77.1 | ||
| Interest | 38.0 | 78.5 | ||||
| Volume and rebates accruals | 47.3 | 64.8 | ||||
| Income tax payable | 6.6 | 35.5 | ||||
| Taxes (property and VAT) | 24.8 | 32.0 | ||||
| Restructuring and plant closing costs | 21.4 | 22.5 | ||||
| Interest and commodity hedging accruals | 6.3 | 10.8 | ||||
| Environmental accruals | 5.5 | 5.7 | ||||
| Other miscellaneous accruals | 64.0 | 60.8 | ||||
| Total | $ | 296.6 | $ | 387.7 | ||
9. Other Noncurrent Liabilities
Other noncurrent liabilities consist of the following (in millions):
| |
March 31, 2004 |
December 31, 2003 |
||||
|---|---|---|---|---|---|---|
| Pension liabilities | $ | 158.6 | $ | 149.0 | ||
| Other postretirement benefits | 10.8 | 11.8 | ||||
| Environmental accruals | 11.0 | 11.6 | ||||
| Payable to affiliate | 29.2 | 29.1 | ||||
| Other noncurrent liabilities | 15.8 | 23.0 | ||||
| Total | $ | 225.4 | $ | 224.5 | ||
10. Restructuring and Plant Closing Costs
As of March 31, 2004 and December 31, 2003, the Company had reserves for restructuring and plant closing costs of $21.4 million and $22.5 million, respectively. During the three months ended March 31, 2004 and 2003, the Company recorded additional reserves for workforce reductions of $8.7 million and $17.1 million, respectively. During these same periods, the Company made cash payments against these reserves of $9.8 million and $4.2 million, respectively (dollars in millions).
| |
Workforce Reductions |
Demolition and Decommisioning |
Non-cancelable lease costs |
Total |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Accrued liability as of December 31, 2003 | $ | 22.5 | $ | — | $ | — | $ | 22.5 | ||||||
| Charges | 8.7 | — | — | 8.7 | ||||||||||
| Payments | (9.8 | ) | — | — | (9.8 | ) | ||||||||
| Accrued liability as of March 31, 2004 | $ | 21.4 | $ | — | $ | — | $ | 21.4 | ||||||
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Detail of these reserves by segment are as follows:
| |
Polyurethanes |
Performance Products |
Pigments |
Total |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Accrued liability as of December 31, 2003 | $ | 15.8 | $ | 2.4 | $ | 4.3 | $ | 22.5 | ||||||
| Charges | 4.8 | — | 3.9 | 8.7 | ||||||||||
| Payments | (6.5 | ) | (0.1 | ) | (3.2 | ) | (9.8 | ) | ||||||
| Accrued liability as of March 31, 2004 | $ | 14.1 | $ | 2.3 | $ | 5.0 | $ | 21.4 | ||||||
As of March 31, 2004 and December 31, 2003, the Polyurethanes segment reserve consisted of $9.7 million and $8.2 million, respectively, related to restructuring activities at the Rozenberg, Netherlands site announced in 2003, $2.2 million and $5.2 million, respectively, related to the workforce reductions throughout the Polyurethanes segment announced in 2003, and $1.9 million and $2.4 million, respectively, related to the closure of the Shepton Mallet, U.K. site announced in 2002. During the three months ended March 31, 2004, the Polyurethanes segment recorded additional restructuring charges of $4.8 million and made cash payments of $6.5 million related to these restructuring activities. Additional charges of approximately $7.7 million related to these restructuring activities are expected to be recorded through 2005, resulting from additional workforce reductions of approximately 36 employees.
As of December 31, 2003, the Performance Products segment reserve consisted of $2.4 million related to the closure of a number of plants at its Whitehaven, U.K. facility, the closure of an administrative office in London, U.K., the rationalization of its surfactants technical center in Oldbury, U.K., and the restructuring of its facility in Barcelona, Spain. During the three months ended March 31, 2004, the Performance Products segment made cash payments of $0.1 million related to these restructuring activities. There are no material additional charges expected related to these restructuring activities.
As of December 31, 2003, the Pigments segment reserve consisted of $4.3 million related to its global workforce reductions. During the three months ended March 31, 2004, the Pigments segment recorded additional restructuring charges of $3.9 million and made cash payments of $3.2 million related to these restructuring activities. Additional charges of approximately $13 million related to these restructuring activities are expected to be recorded through 2005, resulting from additional workforce reductions of approximately 150 employees.
The Company continuously evaluates the effectiveness of all of its manufacturing facilities in serving its markets. The Company has been engaged in a detailed review of its Pigments business to improve its competitive position and financial performance. In connection with this review, the Company announced in April 2004 that it will idle approximately 55,000 tonnes, or about 10% of its total titanium dioxide ("TiO2") production capacity. This action is expected to result in approximately $40 million of annual fixed cost savings, and will involve approximately $100 million of accelerated depreciation and non-cash charges and the payment of cash restructuring costs of approximately $20 million in 2004 and 2005.
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